Answer to Question #51452 in Microeconomics for Tatenda

Question

1. At L=4, K=4, the marginal product of labor is 2 and the marginal product of capital is 3. What is the marginal rate of technical substitution?
2.Explain why perfectly competitive firms cannot earn positive economic profits in the long run.
3. Explain why monopolies are economically inefficient.
4. Why are substantial economies of scale considered a barrier to entry?
5. Why do monopolistic competitors have a tendency to advertise much more than perfectly competitive firms.
6. Briefly explain the concept of price leadership and why it occurs in oligopolistic markets

Answer 1

1) If we draw an isoquant for this production process, it will not be symmetric, because the marginal product of labor is 2 and the marginal
product of capital are not equal.
2) The reason for its shape is the inequality of marginal products of capital and labor.
3) Monopolies are economically inefficient, because they create
deadweight loss, producing less output, then perfectly competitive
firms.
4) Substantial economies of scale are considered a barrier to entry,
because it is very expensive to create large quantities of output.
5) Monopolistic competitors have a tendency to advertise much more than
perfectly competitive firms, because they can affect the market price
and have product differentiation.
6) Price leadership occurs in oligopolistic markets, because there are
few firms in these markets, which need to create their own price
strategies to earn higher profits.